Abstract
The goal of this paper is to analyze the effectiveness of the environmental taxes and emissions trading in achieving cleaner production, that is, higher production per unit of emissions in the European Union (EU). The hypothesis of the paper is that the combined use of taxes and emission permits yields synergistic benefits in addition to their individual contributions. The paper uses panel analysis on the EU27 data from 2005 to 2012. The analysis does not robustly find positive effects from the interaction of these policy instruments, but it confirms that there are no negative ones. Additional interesting results are that, on average, (i) the effects of both instruments on production cleanliness are more beneficial at the regulated industries than at the national level, (ii) emissions trading is more effective than taxes, (iii) both instruments are more effective in the EU15 than in the EU12, and (iv) crisis did not significantly affect production cleanliness in the EU.
Highlights
To achieve climate policy targets, the European Union (EU) focuses on environmental taxes and the European Union Emissions Trading Scheme (EU ETS)
The Pesaran test in our case fails to reject the null hypothesis that the residuals are spatially independent, the main disadvantage of this test is a high probability of erroneous acceptance of the null in the case of alternating signs of the coefficients of correlation between the residuals, which is the case in this analysis
The mean values of logarithms of regulation variables are shown in Table 2 for the full sample, for the sample period of the second EU ETS trading period, and for the EU15 and the EU12 countries
Summary
To achieve climate policy targets, the European Union (EU) focuses on environmental taxes and the European Union Emissions Trading Scheme (EU ETS). These market-based instruments, as opposed to direct regulation, allow for internalization of pollution costs, making cost-effectiveness their main advantage. Due to imperfect information regarding abatement costs and benefits, they favor environmental taxes over emission permits (EP) and their well-designed combination over their individual use. To answer whether currently implemented policies are effective at achieving both maximum benefits (environmental quality) and minimum costs (adverse effects for the economy), we need ex post econometric studies. This paper uses static and dynamic panel analysis on the EU27 annual data for the first two EU ETS trading periods (2005–2012)
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